Islamic Banking and Finance: Fundamentals and Contemporary Issues

Success Factors of Islamic Banks: An Empirical Study

had a sizable impact on financial results, especially that the effect of the stock
market crisis did not affect the Arab region until late 2000. Except for bank
F, the Islamic banks were only little affected because of the scantiness of their
investments in the global market. That is why we see high earning figures
with all the banks for year 2000 that were not attributable to their
management style or to their ability to innovate or market their banking
instruments or services.

Additionally, bank A was able to introduce two new types of investment
instruments that fetched it 20 per cent and 24 per cent of the total earnings
for 2000 and 2001 respectively. This enabled the bank to make up for the
drop in the bank’s investment earnings, to increase customers’ deposits
(restricted and special accounts) by 23 per cent and 24 per cent respectively
and to improve depositors’ share of profit. For bank F, while the average
decline in its total deposits was close to the decline in average earning, the
drop in its investment deposits exceeded the decline in earning by about one
half. In banks B, D and E, there was no visible increment in their revenues
other than what was caused by to boost of year 2000. What remains is to
focus on bank G.

A careful look at this bank’s balance sheet reveals a weakness of its
investment selection policy. While the average return on its murabahah and
istisna[ investments hovers around 10 per cent, revenues on most of its other
investments are very weak. This resulted in a drop of the average ratio of total
revenues to invested assets from 8.79 per cent to 6.46 per cent, i.e. an average
of more than one quarter over three years as shown in Table 14. Perhaps the
most important reason of this decline is its dependence on low-yielding
investments such as short–term international murabahah that increased by
more that five and a half times, until it reached almost one half of the bank’s
investments in 2001.

Table 14: Percentage of Revenues/Invested Assets

BANK 1998 1999 2000 2001 Avg. 98/99 99/00 00/01 98/01

A 7.63 6.62 7.34 6.86 7.12 -13.21 10.89 -6.53 -10.05

B 6.42 6.11 3.27 5.49 5.32 -4.92 -46.45 67.73 -14.60

C 8.01 7.32 7.18 6.15 7.16 -8.67 -1.91 -14.26 -23.19

D 13.35 11.21 15.45 12.57 13.15 -16.04 37.88 -18.64 -5.82

E 8.48 8.72 9.47 8.85 8. 88 2.80 8.62 -6.49 4.41

F --- 8.75 7.60 8.38 8.19 --- -11.30 10.18 -2.27

G 8.79 8.45 7.87 6.46 7.89 -3.89 -6.81 -17.99 -26.55

Average 8.78 8.14 8.31 7.82 8. 24 -7.32 -1.30 2.00 -11.15

Table 14 shows the revenues/investment index. Any conclusion to be
made from the table should take note of the different economic and financial